As promised, today we are bringing you Part 2 of our interview with George Overholser from the Nonprofit Finance Fund. You can read Part 1 here.

Nell: You have argued before that to transform the nonprofit capital market we need a few capital deals at the top of nonprofit market. How do you think the bottom 80% of nonprofits (those with budgets under $1M) fit into a transformed nonprofit capital market?

George: I absolutely believe that the nonprofit capital market needs to extend everywhere, not to just the high profile “darlings” that seem to get all of the attention, but also the millions (!) of smaller nonprofits that truly make up the lion’s share of our vital nonprofit sector.

So why focus first on multi-million dollar growth plans? This is an excellent question!

One part of my response comes in the form of a reminder. Remember: MONEY AND CAPITAL ARE NOT THE SAME THING. Every nonprofit needs money to operate. But quite appropriately, only a small percentage of nonprofit organizations actually aspire to undergo major growth, or any of the other disruptive transformations that are inextricably linked to a capital investment. Very few for-profit companies with revenues of $1 million or less are interested in taking on equity. Nor should they! Small is beautiful! They are the bedrock of our economy. The same goes for our smaller nonprofits.

Still, what about the small organizations that DO aspire to undergo a big transformation, perhaps to double their ongoing impact, for example? Why not focus on them?

Well, I believe that it is absolutely vital that we come up with a way to better capitalize these smaller organizations. Sadly, though, at this stage of capital market evolution, it is still quite expensive to prepare for a successful nonprofit equity campaign. Unless several million is being raised, the hundred thousand or more dollars of required planning, documentation, due diligence, marketing, reporting and campaign management expense is prohibitively high. This constrains us to campaigns of $5 million or more, which, in turn, constrains us to organizations that are already pretty large.

In some ways, we shouldn’t be surprised. There are hundreds of professional fundraising consulting firms that assist with traditional capital campaigns, involving billions of dollars each year. But they, too, are unable to justify their fees unless the campaigns involve a lot more money than most “small” nonprofits are prepared to take on.

I hope that some day there will be a less expensive way to create compelling “asks” for equity capital, but that day has not yet arrived.

As a field, we are still in the very early days of showing how (learning how!) philanthropic equity can help organizations thrive. As such, it seems prudent to focus initially on the limited number of comparatively high-profile organizations that seem best prepared to implement their social impact growth plans. This has led equity funders to partner, at least initially, mostly with organizations that have already shown they can scale. To date, NFF has worked on 16 transactions, involving $310 million of new philanthropic equity raised. Every one of those 16 organizations went into their campaigns armed with track records that showed, compellingly, that they already know how to grow, and are now prepared to accelerate. So far, in just two or three years, the group that we track closely has more than tripled its level of program execution, while also more than doubling the long-term business models that will sustain the execution once the equity runs out. If results like these can be kept up, I expect it will help to attract more and more equity-like funders that serve an ever-broadening range of high-performing nonprofit organizations.

Nell: You have argued in the past that the reason a nonprofit market for growth capital has not materialized is because nonprofit accounting does not allow for a distinction between money to build the organization (investments) and money to maintain services (revenue). But beyond the accounting issues there is also a fundamental lack of understanding about finance in the sector. What do you think will change that?

George: I envision an evolution where funders become more and more specialized. Most funders, I envision, will migrate towards playing the role of BUYER. They will be the real connoisseurs that search among providers to learn what works best. Then, without seeking to change those providers, they will fund the providers to do what they do so well. Collectively, the buyers will be an important part of the field’s overall portrait of sustainability. I would include government as being among the most important buyer-type funders, but so, too, would be the many philanthropic funders who seek the most effective existing ways to achieve social impact with their money.

I would expect a smaller number of funders to focus on playing the role of BUILDER — they are financiers, really, or banks. These financial specialists will play a niche role. Because nonprofits can only take on a limited amount of equity, the BUILDER funders will actually have to compete against each other to “win” the right to invest in the most promising nonprofit firms. And the way they will win in this competition is by offering not just money, but also very sound financial know-how, to the organizations they partner with.

Lots of accomplished BUYERS, a smaller number of accomplished BUILDERS. I sometimes explain this line of thinking by describing what happens when you go into a flower shop – suppose you want them to send flowers to your mom in Florida. Clearly, the vast majority of money that flows into this flower shop is money in exchange for flowers (BUYER-type money). Only a very small percentage of the money that flows into the flower shop comes in the form of capital – a bank loan, perhaps, or, in the early days, an initial equity stake. Thus, the vast majority of check-writers are interested in FLOWERS and the benefits that flowers bring. Only a very small minority of check-writers are interested in BALANCE SHEETS and the other technical details of finance.

I am hopeful that nonprofit equity accounting will allow funders to be better at self-selecting into their chosen areas of expertise. Most will need to be BUYERS of program execution. A smaller number of funders will emerge as the financially-oriented BUILDERS that are needed to provide philanthropic equity and growth stewardship.

Nell: Do you think there is something to be gained by having the bottom 80% of nonprofit organizations better financed, more knowledgeable about finance and with more access to patient capital? What needs to happen to get there?

George: This may sound strange, but I believe that the key to helping most nonprofits to thrive has more to do with improving our BUYING behaviors than to do with finding more capital. To me, the problem is not so much that the bottom 80% lacks access to the capital they would need to maintain healthy balance sheets. Rather, they find themselves chronically saying “yes” to funding arrangements that cause them to deplete these capital reserves. The capital can be raised — but the unhealthy buyer relationships cause the capital to evaporate.

It’s hard to place blame for this phenomenon. Taken one at a time, most of the grants that an organization relies upon make a lot of sense. But, collectively, when multiple funders converge upon an organization with differing theories of change, or expectations that someone else will pay for overhead, or a hunger for customized reporting, special tweaks to the program, and long conversations about small checks, organizations can’t help but burn through whatever small cushions of capital they may have squirreled away.

We need to raise consciousness among BUYERS that whole enterprises — not just programs — should be kept in mind when they make their grants.

Learn more about nonprofit innovation anddownload a free Financing Not Fundraising e-book when you sign up for email updatesfrom Social Velocity.

About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.

2 Comments to A Radical Spin on Capital Campaigns: An Interview with George Overholser, Part 2

I have been eagerly anticipating this interview series and part II. And embrace the ideas in this blog of overhauling the industry’s views and practices of how to finance changing the world. As the ED for a very small nonprofit (<300K) I am greatly disheartened to essentially read "yes, we can cure the large guys, but for the rest of you -80% – well good luck! No answers for you yet."

WOW.

It seems that is the message frequently. In my own local environment we missed at least two significant opportunities to strengthen this organization (not just programs) due to the very same reasoning of focusing on the larger organizations, and letting smaller organizations figure it out on their own. One was a sponsor (funding) another was an educational opportunity that could have helped strengthen our sustainable funding by participating in a major gifts school lead by a leading national fundraiser.

Seems everywhere I look: education, financing, and funding, even in this post where ideas are explored & leading edge thinking is available– and the small guy is getting the short end of the deal. Really is education and awareness for buyers to support the whole organization vs. its programs enough? (Although I agree wholeheartedly, a needed step)

I believe there has to be a way to "create compelling “asks” for equity capital" that is less expensive. There has to be way to finance a small organization's desire to meet the needs of the community which could be mean doubling their impact. We are asked to relearn, redo, change our practices to support (finance) the organization's mission to change the world, but is no one considering the relearning, redoing or changing the expensive processes/methods so all nonprofits can benefit?

And as the leading thinkers of this change, I would look to these interviews and posts to help us all figure it out, question it, find examples, not just say, oh I hope someday….

Thanks so much for your comment on the George Overholser interview. I absolutely agree with you and spent several hours yesterday drafting a post in response to George’s interview on that very same topic. I will post it next week. The entire reason I launched Social Velocity was to help the bottom 80% of nonprofits apply these principles (growth capital, financing not fundraising, capacity funding, etc) that the big guys have been doing and have been supported in doing for the past 10 years. There is an enormous opportunity to transform the nonprofit sector by providing the bottom 80% of nonprofits the opportunity to learn about and implement these new models on a smaller scale. As just one example, take a look at one of our clients, English at Work. They are a very small nonprofit, but together we have been able to raise the capital necessary to help them strengthen their organization and create a plan for growth, read about that at http://www.socialvelocity.net/clients/english-at-work-case-study/ and http://www.socialvelocity.net/2010/06/bringing-small-nonprofits-to-scale/. Heart House is another example of a small nonprofit that we helped create a pitch for growth capital, read about that http://www.socialvelocity.net/2009/09/making-donors-organization-builders/. It’s all about making donors organization builders. We don’t have to wait at all. We can start doing this with small nonprofits right now, and we are. Thanks so much for writing!

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